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New here, considering early retirement offer
Old 05-18-2012, 11:54 AM   #1
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New here, considering early retirement offer

Hello,

My company has made me an early retirement offer that I am considering and have to make a decision on in the next couple of weeks. I'm glad I found this site!

Background: My wife and I are both 54 and in good health. We have about $1.3 million stashed away in 401ks ($725K), IRAs ($50K), investments($225K) and cash ($300K). My income is $150K not counting bonuses (which can vary from $10K-$40K), my wife brings in around $15K. About 30-35% of our total income goes to the above savings/investment vehicles.

The major unknown expense (other than health care, of course) is our youngest will be graduating from high school next year and college plans haven't been solidified. We were able to get our other kids through college without any debt for us or for them, and we hope to do the same for our last child. A "known" expense is replacing 2 of our cars that we have had for over 10 years - we bought them 2-3 years old used, so we would do that same thing again. That will impact our insurance rates but not too badly.

Our house is almost paid off, our mortgage is $800/month. The mortgage balance is $90K and it is valued (by realtors if it were on the market for sale) at $400K. While it is tempting to sell it and move to a lower tax area (we are near states with lower state income tax and one that doesn't tax pension income), we still have lots of family/friends ties to our area, so that would be hard unless as a last resort.

We have zero credit card debt, we use 2 cards but pay them off every month.

My "hope" is to retire and not be required to work at all. In all likelihood I would work just because I enjoy being active - I just want it to be a choice and not a requirement to live . Yeah, wishful thinking these days . We have been going to a financial planner and using various financial calculators, and based on our continued savings and market probabilities everything seemed to point to sometime in of 2015 as the likely time I could achieve that.

The offer my company has made is "we will reduce your salary by 30%, and also reduce our matching 401K contributions proportionately. But you will only have to work 3 days a week. We'll guarantee your job (layoff have been occurring) through the end of 2013, but you must retire no later than December 2013."

I will get a retirement pension that will be worth around $62k a year by that time. We have estimated our retirement expenses to start at $95k a year (then increase with a yearly adjustment for inflation). With the "rule of thumb" of drawing no more than 3-4% of your savings, we'd be pulling around $33K (for starters) to meet our expenses, but this is below that range. Even with inflation, it seems doable. However, I really don't get health care - they provide a "fund" that I can use to pay health care premiums, but folks who have retired have told be don't expect it to last more than 2-3 years.

I'm not factoring Social Security into this. My benefits are projected to be around $21k/year at 62 or 28K/year at 66, but who knows how they will be impacted by the current political and economic situation.

The main drawbacks I see with this offer is:
- The salary reduction will cut back on our ability to save. I guess with college on the way, and future health costs rising, my wife and I wanted to sock away as much as possible to address this. We have gotten used to saving a high percentage of our income without it affecting our lifestyle (we're not extravagant folks). When we had multiple kids in college we were also saving practically nothing, but we did see the benefits of having us (and them) without student loan debt, so it was worth it then.
- I really wonder if I could reduce my workload to 2 days a week. I have more of a "creative/troubleshooting" job that I enjoy (other than the commute and travel), and it might find it tough to limit myself if, after working 3 days for the week, I get an idea or a request that interests me - it would be tough to delay my thoughts/actions on it until the next week. But maybe that shows that I am a workaholic and need to break that habit .

So, what do you think? Does it seem to make financial sense to take the offer? Are my concerns too overblown? Any input is appreciated. Thanks!
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Old 05-18-2012, 01:08 PM   #2
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Your pension is quite generous, actually. Defined benefit plans, even without COL adjustments, are rare today. Does that pension provide you access to their health plan even if you must pay 100% for it?

You don't seem to have any choice about the 3-day week proposal short of finding another job. You will need to manage your co-worker's and manager's expectations. Will there be anyone assuming your responsibilities on your days off? I would discourage voice mail messages (turn off that service when you are away).
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Old 05-18-2012, 01:22 PM   #3
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Solving for spending level at a 95% success rate, looks like your plan is pretty doable. I entered $1.3M portfolio, 41 years, 28K/yr Soc Sec starting 2024, 62K/yr pension (non COLA) starting 2014, retiring 2014, $0 savings from now on (since wage reduction about equal to current savings rate):
Quote:
Looking for a spending level that will result in 95% success rate . . . . . . . . . . . . . . . [done]

A spending level of $98,351 provided a success rate of 95.0% (100 total cycles, of which 5 failed). This spending level is 7.57% of your starting portfolio. (Your spending is assumed to come from any Social Security and pensions you entered, as well as from the portfolio).
You've probably already run this, the standard result using $95K/yr spending level for year one shows:
Quote:
Your spending in every year after the first year will be adjusted for inflation, so the spending power is preserved.

Because you indicated a future retirement date (2014), the withdrawals won't start until that year. The tested period is 2 years of preretirement plus 39 years of retirement, or 41 years.

FIRECalc looked at the 100 possible 41 year periods in the available data, starting with a portfolio of $1,300,000 and spending your specified amounts each year thereafter.

Here is how your portfolio would have fared in each of the 100 cycles. The lowest and highest portfolio balance throughout your retirement was $-613,609 to $29,107,603, with an average of $6,907,488. (Note: values are in terms of the dollars as of the beginning of the retirement period for each cycle.)

For our purposes, failure means the portfolio was depleted before the end of the 41 years. FIRECalc found that 4 cycles failed, for a success rate of 96.0%.
As for adjusting to working 3 days/week, only you can know the answer to that question.
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Old 05-18-2012, 02:03 PM   #4
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Originally Posted by jollystomper View Post

My "hope" is to retire and not be required to work at all. In all likelihood I would work just because I enjoy being active - I just want it to be a choice and not a requirement to live .
Hi jollystomper, welcome to the forum. While other's help answer your questions, I want to point out that you do not need to work to be active. If you need help with that, just spend some time looking over this thread http://www.early-retirement.org/foru...37868-104.html or reading other threads in the "life after FIRE forum Life after FIRE - Early Retirement & Financial Independence Community
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Old 05-18-2012, 02:45 PM   #5
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Originally Posted by jollystomper View Post
.....I'm not factoring Social Security into this. My benefits are projected to be around $21k/year at 62 or 28K/year at 66, but who knows how they will be impacted by the current political and economic situation......
Is your wife entitled to SS benefits? Typically they would be those from her own work record or 50% of yours, whichever is more. If she is, that might help seal the deal.

Some additional things to consider. Price out health care insurance as if your were retiring now to get that number nailed down finer.

Your son may be entitled to more financial aid when you have less income coming in. There may even be a play to defer receiving your pension and live off of taxable funds for a while if it increases his financial aid. you'll have to crunch some numbers.
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Old 05-18-2012, 10:05 PM   #6
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Hard for me to determine whether or not the OP works for the USPO or private industry. There are some kinks in the computation of SS for spouse if USPO is the case. If he works for HP lots of luck bull-working off 3 days out of 5 (my personal impression of the org).
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Old 05-19-2012, 08:54 PM   #7
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Your pension is quite generous, actually. Defined benefit plans, even without COL adjustments, are rare today. Does that pension provide you access to their health plan even if you must pay 100% for it?

You don't seem to have any choice about the 3-day week proposal short of finding another job. You will need to manage your co-worker's and manager's expectations. Will there be anyone assuming your responsibilities on your days off? I would discourage voice mail messages (turn off that service when you are away).
Thanks for the reply! They do, allow me to have access to the plan - they give you a certain amount of dollars you can use to apply to the premiums, and as long as they dollars last we have access. We can choose to use some of those dollars and some of the real money, as folks who have retired told us it helps stretch things out. The drawback is that we pay much higher premiums once retired - e.g. we pay about $400/month now for 3 of us, once retired if we stay on the same plan the premiums will go to $1500/month.

Good point about managing folks expectations, the way my job works that can be a challenge. When I return from vacation there is always a bunch of stuff waiting for me for folks "waiting for me to come back", and I can see the same happening on a shortened schedule, even with turning off my email and phone. But part of that is my fault, sometimes the requests are so interesting, or give me interesting ideas that I want to apply, that I can't resist. I'll have to work on that.
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Old 05-19-2012, 09:00 PM   #8
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Solving for spending level at a 95% success rate, looks like your plan is pretty doable. I entered $1.3M portfolio, 41 years, 28K/yr Soc Sec starting 2024, 62K/yr pension (non COLA) starting 2014, retiring 2014, $0 savings from now on (since wage reduction about equal to current savings rate):

You've probably already run this, the standard result using $95K/yr spending level for year one shows:

As for adjusting to working 3 days/week, only you can know the answer to that question.
Thanks very much! We are having our financial adviser re-run their simulation they did for us with these new factors (they did it before with assumptions of continued saving through 2014 and retiring end of that year) and I think they said 99% of the models said we'd have success. It will be interesting what their model says with this new data.
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Old 05-19-2012, 09:06 PM   #9
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Hi jollystomper, welcome to the forum. While other's help answer your questions, I want to point out that you do not need to work to be active. If you need help with that, just spend some time looking over this thread http://www.early-retirement.org/foru...37868-104.html or reading other threads in the "life after FIRE forum Life after FIRE - Early Retirement & Financial Independence Community

Thank you! I will check out that thread and forum. Perhaps my issue is that I can think of many things to keep me active, but they seem so "selfish" - golf and biking (now that I'm a bit too old for the contact sports I used to enjoy), fixing up the house landscaping, projects like digitizing 30+ years of photos, videos, and vinyl albums, helping out more at our church and a couple of community organizations, etc. - I guess I want the selfish option to pursue some part time paying gig if something seemed interesting, but not have to.
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Old 05-19-2012, 09:39 PM   #10
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As the retired wife of a retired husband the most important aspect of domestic peace in retirement is a husband busy away from the house. We are talking territory here... Traditionally the home is the wife's domain. Husbands without better things to often overlook this detail.
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Old 05-19-2012, 10:14 PM   #11
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One of the problems with part time work is that sometimes, while the part time pay is fixed the part time w*ork is subject to upward creep. This has been my wife's experience and that of some friends who have gone part time.

Since you have a definitive end date, you may be in a position to politely decline the after hours demands on your time.
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Old 05-19-2012, 10:22 PM   #12
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Is your wife entitled to SS benefits? Typically they would be those from her own work record or 50% of yours, whichever is more. If she is, that might help seal the deal.

Some additional things to consider. Price out health care insurance as if your were retiring now to get that number nailed down finer.

Your son may be entitled to more financial aid when you have less income coming in. There may even be a play to defer receiving your pension and live off of taxable funds for a while if it increases his financial aid. you'll have to crunch some numbers.
Thanks! My wife will be entitled to SS benefits, and 50% of mine is more than hers (she took the academic career route, I took the IT/engineering career route).

We've priced out health care, one reason we set our expected expenses to start at $95K... retirement premiums will start at $1500/month, then (based on historical spending) we planning for out of pocket expenses to be another $4000... that makes it $22K/year for medical alone, and that is just the first retirement year (some of that will be reduced via money the company gives me to apply towards premiums if we stay on their insurance).

We have thought about financial aid with less income, but we do have to look at it some more.
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Old 05-19-2012, 10:24 PM   #13
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Hard for me to determine whether or not the OP works for the USPO or private industry. There are some kinks in the computation of SS for spouse if USPO is the case. If he works for HP lots of luck bull-working off 3 days out of 5 (my personal impression of the org).
It is private industry - not HP, however.
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Old 05-19-2012, 10:37 PM   #14
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As the retired wife of a retired husband the most important aspect of domestic peace in retirement is a husband busy away from the house. We are talking territory here... Traditionally the home is the wife's domain. Husbands without better things to often overlook this detail.
Good point. We've pretty much carved out our territory already - she has the most of the shared indoor areas and bedrooms and her decorating ideas take priority - I tend to be a "minimum needed for practical purposes" type of person. I get the areas were the electronics are (family room and my "man cave"), as well as anything outside that is not flowers or food garden. Honestly, there are vacation days where we are both doing things around the house and we need to make an effort to see each other, so me being around more shouldn't be a conflict. Plus, there are several golf courses nearby that change < $20 a round, so if I have to disappear for peace, it won't be too bad... We also have a good spread of friends across hers/mine/ours groupings, and that helps.
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Old 05-20-2012, 03:44 AM   #15
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It does not sound like you have much choice, but what is offered looks very good to me. You should do a rough budget out 5 years or so and see how things look. Consider how you would cut expenses if you REALLY had to.

Much good advice given here already. Things that most people do not think about ahead of time.
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Old 05-20-2012, 04:13 AM   #16
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+1. I would take the offer. Welcome to the forum.
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It does not sound like you have much choice, but what is offered looks very good to me. You should do a rough budget out 5 years or so and see how things look. Consider how you would cut expenses if you REALLY had to.
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Old 05-20-2012, 06:36 AM   #17
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Good point. We've pretty much carved out our territory already - she has the most of the shared indoor areas and bedrooms and her decorating ideas take priority - I tend to be a "minimum needed for practical purposes" type of person. I get the areas were the electronics are (family room and my "man cave"), as well as anything outside that is not flowers or food garden. Honestly, there are vacation days where we are both doing things around the house and we need to make an effort to see each other, so me being around more shouldn't be a conflict. Plus, there are several golf courses nearby that change < $20 a round, so if I have to disappear for peace, it won't be too bad... We also have a good spread of friends across hers/mine/ours groupings, and that helps.
Brat makes a good point often overlooked. In our case a home office did the trick, to keep me out of the way. Before that I spent a lot of time in the local library.
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Old 05-20-2012, 07:07 AM   #18
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It does not sound like you have much choice, but what is offered looks very good to me. You should do a rough budget out 5 years or so and see how things look. Consider how you would cut expenses if you REALLY had to.

Much good advice given here already. Things that most people do not think about ahead of time.
I agree with Ed. It sounds like you will either take the deal or get laid off immediately. No choice there. However, there is nothing keeping you from looking for other employment while still working there. It appears that your finances are doable to retire but you will have to watch your spending carefully. Ideally, retiring based on your deal should coincide with a lifestyle reduction to increase your safety. For most of us, retirement is a balancing act between assets and living expenses.

As for the work that piles up when you're off, you need to let people know quite emphatically that your hours have been cut. You didn't ask for this and you would love to go back to five days per week (even if you don't). I wouldn't check voice mails or emails on your off days. If contacted for an "emergency," you need to have your boss agree that this would count against the following weeks workday or you would get OT. Good luck. They're doing it to you so play by the "rules." You have a 24 hr/wk job - 3 days at 8 hrs each.
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Old 05-20-2012, 08:37 AM   #19
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It is private industry - not HP, however.
How confident are you about the stability/quality of the pension fund itself? Its no mystery that a lot of funds are woefully under-funded...unlikely the govt can absorb all of them and pay 100% of benefits when it all finally hits the fan.

I'd pull the acturial report on the pension fund and ensure that you believe its sound. Look for tell-tale white lies like "...assuming 8% annual returns..."

Good luck.
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Old 05-20-2012, 09:38 AM   #20
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+ krotoole's comment.
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